What are bonds and how do they provide stable returns for retail investors? — Everything you need to know

Mint

5 days ago

Once a niche segment reserved for institutions and government borrowers, India's bond market is undergoing a significant revolution. Backed by a surge in private sector issuances and a growing appetite among retail investors, the Indian bond market is now expanding at a pace that's hard to ignore.
According to data from the Jiraaf Bond Analyser, India's debt capital market has grown at a compound annual growth rate (CAGR) of 25% over the last decade.
As interest in non-equity assets grows amid market volatility and rate cycle shifts, understanding how the bond market works — and where it's headed — is more crucial than ever.
Bonds are financial instruments where you lend money to a government, organisation, or company for a fixed period. In return, the lender receives regular interest payments, and at maturity, the initial investment, known as the principal or the face value, is repaid.
On a fundamental level, bonds are considered more stable than equity investments, making them lucrative for investors who aspire to preserve their wealth and earn steady returns.
When you are purchasing a bond, you are essentially becoming a lender. Furthermore, every bond is distinct and comes with important features: Face value: This is the amount you will receive at maturity. This simply means that you will receive the initial face value payment made by you upon the completion of the tenure of your bond.
This is the amount you will receive at maturity. This simply means that you will receive the initial face value payment made by you upon the completion of the tenure of your bond. Interest rate (Coupon): This is the interest rate paid to you, generally on a semi-annual or annual basis. Annual here means you will get the entire payment once a year, whereas semi-annual means that you will get the complete payment in two parts, i.e., every six months.
This is the interest rate paid to you, generally on a semi-annual or annual basis. Annual here means you will get the entire payment once a year, whereas semi-annual means that you will get the complete payment in two parts, i.e., every six months. Maturity date: The date when the issuer returns your principal amount is known as the maturity date.
For example, if you buy a bond issued by the Government of India for ₹ 20,000 at an interest rate of 6% with a 5-year maturity, then you would earn ₹ 1,200 every year. Further, after five years, you will get your ₹ 20,000 back.
There are many benefits of investing in bonds for investors looking to diversify beyond equity market: Regular income: These investment tools are exceptional for retirees or those seeking a steady income. This is possible due to periodic interest payments.
These investment tools are exceptional for retirees or those seeking a steady income. This is possible due to periodic interest payments. Lower risk: Indian government bonds, i.e., G-Secs and AAA-rated corporate bonds, are generally safer than equity investments due to lower volatility.
Indian government bonds, i.e., G-Secs and AAA-rated corporate bonds, are generally safer than equity investments due to lower volatility. Diversification: Including bonds can boost the diversification of your portfolio. It can offset fluctuations from equities, especially during volatile market conditions. It can also provide a fairly reasonable hedge for wealth conservation during recessions and economic downturns.
You can invest in bonds in the country through: Direct purchase of government bonds: This can be done through the Reserve Bank of India's retail platform.
This can be done through the Reserve Bank of India's retail platform. Invest in bond mutual funds: These are funds that pool money to buy bonds and provide easy access.
These are funds that pool money to buy bonds and provide easy access. Stock exchanges and brokers: Government and corporate bonds are also readily available on the BSE and NSE for investments. Aspirational investors can look to invest in them through these platforms.
Therefore, given bonds provide safety, comfort, and predictability in returns. Still, they carry risks such as changes in interest rates or corporate defaults. Hence, by clearly acknowledging how bonds work, investors can better protect their capital and generate income consistently. Holistically, bonds are investment options that can contribute to long-term financial stability and growth.
For all personal finance updates, visit here.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. Investors should assess their risk profile and consult a qualified financial adviser before making bond investments.